MoFo New York Tax Insights, Vol 9, Issue 12

A SECOND APPELLATE COURT UPHOLDS THE CONSTITUTIONALITY OF NEW YORK'S STATUTORY RESIDENCY SCHEME

By Hollis L. Hyans

The New York Appellate Division, Third Department, has upheld the dismissal of a declaratory judgment action brought by out-of-state domiciliaries challenging the constitutionality of New York's system for taxing the income of statutory residents. Chamberlain v. N.Y.S. Dep't of Taxation & Fin., No. 525967, 2018 NY Slip Op. 07383 (3d Dep't, Nov. 1, 2018). The court agreed with a decision by the First Department in Edelman v. New York State Department of Taxation & Finance, 162 A.D.3d 574 (1st Dep't, 2018), and found that the U.S. Supreme Court's decision in Comptroller of the Treasury v. Wynne, 135 S. Ct. 1787 (2015), does not affect the constitutionality of New York's statutory residency scheme.

Statutory Background. Under New York's personal income tax law, individuals who are domiciled outside New York may be taxed as "statutory residents" of New York if they maintain a permanent place of abode in New York and are present in New York for more than 183 days during a year. Tax Law § 605(b). While New York, like many states, provides a tax credit for income taxes paid by its residents to other states, the credit is only available where the taxes paid to the other state arise from income "derived" from (i.e., earned within) that other state. Tax Law § 620. The credit is generally not available for intangible or investment income, which is usually not treated as having been directly derived from any specific state.

Twenty years ago, the New York Court of Appeals (the State's highest court) upheld a constitutional challenge to New York's statutory residency scheme. Tamagni v. Tax Appeals Trib., 91 N.Y.2d 530 (1998). The plaintiffs in that case, who were domiciled in New Jersey and statutory residents of New York, asserted that the potential for multiple taxation inherent in New York's statutory residency scheme discriminated against interstate commerce in violation of the dormant Commerce Clause. The Tamagni court concluded that the dormant Commerce Clause was not applicable to the income taxation of state residents and quoted the U.S. Supreme Court decision in Goldberg v. Sweet, 488 U.S. 252, 266 (1989), for the proposition that, even if the dormant Commerce Clause was generally applicable, it would not apply to the plaintiffs because it does not "protect state residents from their own state taxes."

However, in 2015, the U.S. Supreme Court in Wynne explicitly repudiated the statement in Goldberg that was relied on in Tamagni. In the Wynne decision, the U.S. Supreme Court concluded that Maryland's residency credit scheme, which allowed credits against a state- level tax for taxes paid to other states but not against a county-level tax, violated the Commerce Clause's "internal consistency" test, which requires a tax to be structured so that if every state were to impose an identical tax, no multiple taxation would result.

Chamberlain Case. Plaintiffs Richard Chamberlain and Martha Crum, a married couple domiciled in Connecticut, worked in New York City during 2009 through 2011. They filed joint Connecticut resident income tax returns and paid tax on their worldwide income, which included income from their sale of a business entity that did business in New York. They also filed joint New York Nonresident Income Tax Returns, based on wage income earned in New York. Their nonresident returns were audited by the Department of Taxation and Finance, which determined that they were statutory residents who should have filed New York resident income tax returns. The Department assessed tax of over $2.7 million on their intangible income, derived from interest, dividends and capital gains, which was calculated without any credits for the taxes Mr. Chamberlain and Ms. Crum had paid to the State of Connecticut. The couple paid the disputed amount and filed an action in the Supreme Court, Albany County, seeking a declaratory judgment that New York's taxation of statutory residents violates the Commerce Clause. The trial court upheld the statute, found that "Tamagni remains controlling law" despite the U.S. Supreme Court decision in Wynne, and cited Tamagni in concluding that the "double taxation that occurred here 'does not fall on any identifiable interstate market' and 'does not favor intrastate commerce over interstate commerce in a manner violative of the dormant Commerce Clause.'" The plaintiffs appealed directly to the Court of Appeals, which transferred the appeal to the Appellate Division, Third Department, stating that the constitutional question presented was "not substantial."

Appellate Decision. In a single paragraph, the Appellate Division upheld the determination of the trial court, concluding that Tamagni...